Introduction
The time-limit provisions contained in the Taxes Consolidation Act 1997 (TCA 1997) serve an important role in providing certainty and safeguarding taxpayers against the reopening of their tax aairs outside a four-year period. The exact construction of these provisions has, however, been the source of many disputes between taxpayers and the Revenue Commissioners (Revenue), that ultimately have been resolved by the Superior Courts. O'Sullivan v The Revenue Commissioners [2024] IEHC 611 is the most recent judgment in the area and provides some welcome insights into the proper construction of the provisions, particularly in light of the judgment of Mulcahy J in Tobin v The Revenue Commissioners [2024] IEHC 196 earlier this year.
This article examines the decision in O'Sullivan and outlines some of the key insights and implications of the case in interpreting the time-limit provisions more generally.
Background
Relevant legislation
For periods before 2013, the relevant rules governing assessments and time limits were broadly contained in Part 41 TCA 1997. These provisions were revised in Finance Act 2012, although many of the concepts from Part 41 have been retained in these new rules, now contained in Part 41A TCA 1997.
Part 41 (i.e. the pre-2013 regime) established administrative rules in relation to the ling of tax returns and the issuing of assessments. Under s951 TCA 1997 a chargeable person was required to le an annual tax return, and under s954(2) TCA 1997 the inspector was required to make an assessment based on the particulars included in the person's return.
The time-limit provision was included at s955(2) TCA 1997 and provided that where a person has made a return for a chargeable period "and has made in the return a full and true disclosure of all material facts necessary for the making of an assessment for the chargeable period", Revenue would be precluded from issuing an assessment for that chargeable period more than four years after the end of the year in which the return is led.
Section 956 TCA 1997 provided that, for the purpose of making an assessment, the inspector "may accept either in whole or in part any statement or other particular contained in a return" and further provided that in cases where an assessment had been made, the inspector was not precluded "from making such enquiries or taking such actions...as he or she considers necessary to satisfy himself or herself as to the accuracy or otherwise of that statement or particular". Section 956(1)(c) imposed a time limit on the inspector's right to make enquiries or take actions to satisfy themselves of the accuracy of a statement or particular, precluding the inspector from exercising those powers more than four years after the end of the chargeable period during which the return was led. However, that time limit did not apply if "the inspector has reasonable grounds for believing that the return is insucient due to its having been completed in a fraudulent or negligent manner".
Background facts
O'Sullivan involved a transaction to which the taxpayer was party in 2005. Under the transaction, rights attaching to shares in a company, Tramult, were transferred to a group of individual shareholders (including the taxpayer). The shares that originally comprised the rights that were transferred were held by another company in which the taxpayer was a shareholder (MMP). Tramult was subsequently liquidated, and on liquidation the taxpayer received a capital distribution of €394,697. The taxpayer considered that the transaction was capital in nature. The application of s547 TCA 1997 resulted in the acquisition cost of the Tramult shares being equal to the liquidation proceeds. Accordingly, the taxpayer considered that there was no capital gain to report and did not include the transaction in his return.
Revenue disagreed with the taxpayer's approach and considered that the transfer of rights in the Tramult shares from MMP to the taxpayer and the other individual shareholders was a distribution chargeable to income tax under s130 TCA 1997. In February 2011 (more than four years after the taxpayer led his return), Revenue opened an investigation into the transaction. In December 2011 Revenue issued an assessment to income tax to the taxpayer in respect of the transaction.
The taxpayer appealed the assessment. The hearing at the Tax Appeals Commission (TAC) was stayed while Hughes v The Revenue Commissioners [2019] IEHC 807 made its way through the appeals process. That case involved a similar transaction, and Revenue was successful in arguing in the High Court that the transfer of rights between share classes was a transfer of assets for the purposes of s130(3)(a). The High Court held that the transaction should therefore be regarded as a distribution chargeable to income tax. The technical merits of that nding are beyond the scope of this article; suce to say that once O'Sullivan was heard at the TAC and the High Court, it was accepted that as a matter of law, based on the decision of the High Court in Hughes, the transaction gave rise to a charge to income tax. The only matter left to be determined was whether Revenue was precluded from issuing the assessment outside the statutory time limit in s955(2) TCA 1997.
Section 955(2) TCA 1997: Subjectivity is not the yardstick
Impact of Tobin on taxpayer's arguments
In O'Sullivan one of the main arguments made by the taxpayer in written submissions was that the four-year rule in s955(2) should be interpreted in light of s956, such that Revenue would be precluded from issuing an assessment outside the four-year period unless there was evidence of fraud or negligence.
Somewhat unhelpfully for the taxpayer, the decision in Tobin (which also considered the application of s955(2)) issued just seven days after written submissions were made in O'Sullivan. A full examination of Tobin is beyond the scope of this article, and we have limited our comments to the aspects of the decision that informed Nolan J's decision in O'Sullivan.1
In Tobin the High Court was asked to consider the application of the four-year time limit in s955(2) in circumstances where the taxpayer had received a Single Payment Scheme (SPS) payment but had not included it in his income tax return. The taxpayer believed that a company that he had established, DTFL, was properly entitled to the SPS payment. That company had included the payment in its corporation tax return.
The High Court in Tobin held that the test in s955(2) (whether a full and true disclosure of all material facts had been made) is an objective one. The fact that the taxpayer believed he had correctly completed his return was not a relevant consideration in applying the test.
Approach to statutory interpretation
The High Court's analysis in Tobin was based on the application of the plain and ordinary meaning of the language in s955(2) and the meaning of that language in its broader statutory context (in line with the general approach of the Irish courts to statutory interpretation).2
In assessing the broader statutory context of s955(2), Mulcahy J considered both s955(4); which permits taxpayers to make expressions of doubt), and s956(2)(c); which permits Revenue to raise enquiries outside the four-year limitation period in cases of fraud or negligence. Both of those provisions incorporate subjective elements. In comparing those provisions to s955(2), which does not expressly incorporate a subjective element, Mulcahy J was satised that: "there was no intention to incorporate any subjective element into that section".
Nolan J's decision in O'Sullivan emphatically endorses the reasoning of Mulcahy J and conrms that the test in s955(2) is an objective one. Nolan J accepted that the taxpayer's subjective belief in respect of his returns (i.e. that he was not required to include the transaction) was not a relevant consideration in ascertaining whether the return could be said to include a full and true disclosure of all material facts in the application of the test in s955. In the words of Nolan J, "subjectivity is not the yardstick".
Broader interaction between s955 and s956
As a result of the decision in Tobin, the taxpayer's arguments in O'Sullivan evolved by the time of the oral hearing. Given the High Court decision, it would have been dicult for the taxpayer to sustain the argument that s955 should be interpreted in light of s956, as originally argued in written submissions. Indeed, Nolan J expressly accepted "not only the logic of Mulcahy J's reasoning, but also out of the comity of judgments, that s955 and s956 are not to be read together but in fact apply to dierent circumstances".
The taxpayer argued, instead, that the provision relevant to the facts of O'Sullivan was s956, as the assessment was made on foot of an enquiry or investigation. The taxpayer argued that s955 operated only in cases where there was no such enquiry. Nolan J considered that there was no evidence that the assessment arose out of "enquiries or investigations" as required under s956 and so could not accept that argument.
It was further noted that the proper course of action in respect of enquiries under s956 would have been for the appellant to invoke the relevant safeguards that prohibit out-of-time enquiries, either by way of judicial review or by availing of the specic 30-day appeal procedure in s956(2), but neither remedy was availed of (see paragraphs 57 and 60 of the judgment).
Thus, the question of whether the assessment was issued outside the four-year time limit was one to be considered under s955 only. The key question for consideration was whether the taxpayer had made a full and true disclosure of all material facts necessary for making an assessment, and as noted above, Nolan J was satised that the test was an objective one.
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